Why Soft Landings are Impossible in Property Booms
The Ultimate Subprime Lender
Foreclosures Hit Record Numbers as Region Continues to Lose Jobs
By Dina ElBoghdady
Washington Post Staff Writer
Saturday, March 31, 2007; A01
DEARBORN HEIGHTS, Mich. -- Janet Laitis leaned on a chain-link fence in her front yard, dragged on a cigarette and pointed to the homes on her block that lenders have seized in just the past two weeks.
"There. There. There," said Laitis, 70, pointing across the street, down the street and then to the modest ranch house next door. "This neighborhood is deteriorating before my eyes."
Within a square mile of Laitis's house in this bedroom community outside Detroit, more than half the 96 homes on the market are foreclosed properties. The situation is not uncommon in pockets of the industrial Midwest, where a record number of people are missing their mortgage payments and losing their homes.
While lax lending policies have been blamed for the unfolding home-mortgage crisis across the country, the distress in the Midwest has been exacerbated by fundamental problems with the economy. The region has been devastated by a severe drop in manufacturing jobs as the U.S. automobile industry shrinks.
"There's a structural shift going on that's undermining the unionized, industrialized states, and Michigan is leading the way," said Donald Grimes, a senior research specialist at the University of Michigan. "When you talk to people in Michigan, you can tell from their voice and their demeanor that they are just depressed."
The housing bubble of recent years has burst and home prices are under pressure in many parts of the country. How far they fall will be determined in large measure by the strength of the economy, experts say, since job and income growth ultimately determine how much people can pay for housing. The U.S. economy is growing, but the pace of growth has slowed markedly of late.
States like Michigan and Ohio, struggling with their particular economic problems, illustrate just how bad things could get in the housing sector if the national economy falls into a recession. They are, moreover, politically important swing states; rising anger there over the housing situation could help determine the outcome of the 2008 presidential election.
Michigan has lost 305,000 jobs since 2001. Economists estimate that 40 percent of the cuts came from automakers and their suppliers, who have shed jobs each of the past six years as they have tried to regain their competitive edge.
About 65,000 people moved out of Michigan from July 2005 to July 2006, the U.S. Census Bureau reported. The migration eroded already weak demand for houses, which in turn hurt prices. In the last three months of 2006, Michigan was the only state in the nation where home prices fell, dropping 0.4 percent from the same time in 2005.
Even during the first half of the decade, when home prices jumped in most of the country, Michigan's stagnated. Dana Johnson, chief economist at Comerica Bank, said home prices typically outpaced income in most of the nation during the housing boom. But in Michigan, income plummeted and dragged housing down with it.
Cash-strapped homeowners could no longer sell their homes or refinance their way out of trouble. Many got stuck with adjustable-rate mortgages offering low teaser rates that spiked in later years. Now many borrowers are struggling.
"It's been a spillover from the weak economy to the housing sector," Johnson said. "What we've seen here is a one-state recession."Losing Jobs and Value
Brian Minjares, 40, is living that recession first-hand. His story is proof that no one in Michigan is immune to the state's financial woes.
Three years ago, he left his job at a financial services firm to start his own practice with a partner in the Detroit suburb of Southfield. Minjares took out a home equity line of credit to finance the business. At the time, his house was appraised at $350,000 and he owed $275,000, he said. The bank gave him a loan equal to 100 percent of his equity.
As the housing crisis worsened, the value of his home dropped to $260,000. Minjares could not afford to sell it because he owed more than it was worth. He could not afford to keep it because, as the rates on his loans adjusted, his monthly payments jumped to $3,000 from $2,100.
Meanwhile, his client roster was drying up. With the auto industry in decline, many of his customers' businesses crumbled. "So they had no money to give me to invest for them," Minjares said. He coped by running up credit-card debt.
But he fell behind on his payments and the bank foreclosed on his Colonial in Flat Rock, not far from Detroit. Minjares shut down his business and now sells cleaning products. He rents a condominium from his brother.
"You just have to cut your losses and run," Minjares said. "You have to take into consideration your marriage and your health and you say to yourself: 'It's just a house.' "
Ralph Newkirk, an agent with the Michigan brokerage Real Estate One, hears similar stories every day. The foreclosure situation is so extreme that his firm created a division two years ago with 25 agents who sell only foreclosed homes; Newkirk heads it.
Back then, the average sales price on foreclosed homes was about $70,000. Since then, the price has more than doubled, suggesting the problem is no longer confined to low-income neighborhoods in Detroit. "The problem is moving out to the suburbs," Newkirk said. "It's spreading like a cancer."A Tangible Form of Pain
Michigan's strong tie to the auto sector has been a source of pain before. Strikes damaged its economy in 1967 and high oil prices crippled Detroit in the 1980s.
But Michigan's most recent trouble is "the most severe crisis in the state's existence," defying the pattern of past economic cycles, when Michigan bounced back quickly, said David Littmann, senior economist at the Michigan's Mackinac Center for Public Policy.
This time, the rest of the country recovered from the 2001 recession, but Michigan's per capita income remains 7 percent below the national average, Littmann said. For the first time since the Great Depression, Michigan is a poor state relative to the rest of the nation.
"This is not a cyclical problem anymore, and housing is the most tangible form of the pain," Littmann said.
For most of the past year, Michigan has ranked among the three states with the highest percentage of late mortgage payments and foreclosures, surveys by the Mortgage Bankers Association show. In the fourth quarter, it came in third, behind Ohio and Indiana, with 2.39 percent of its loans in foreclosure.
Many economists say, and union officers agree, that those hardest hit are not auto workers who lost jobs. Many received buyouts that should keep them afloat for a while. And because they tend to be older, some have paid off their mortgages.
Those feeling the worst squeeze, rather, are workers at the auto supply companies, such as Max, 44, an engineer who spoke on condition that his last name not be used because he is embarrassed by his situation.
Max bought a condominium in the Detroit suburb of Plymouth using a traditional fixed-rate mortgage more than five years ago. But three years later, his firm took away company cars from its workers, hiked insurance premiums and cut raises and bonuses -- raising Max's monthly living expenses and reducing his pay.
Max responded by refinancing his condo twice. Though he did not realize it then, the second loan was adjustable. Over time, his monthly payments rose from $1,500 to $1,800 to $1,950.
"I wasn't even reading the paperwork," said Max, who makes $106,000 a year.
Weeks ago, Max turned in his keys to his lender. The bank paid him $500 and took possession of the condo earlier than it otherwise could under Michigan law.
In fact, across the country, official foreclosure numbers do not capture the full scope of the mortgage problem, since many people are doing what Max did. Others are signing over their deeds to the bank in lieu of foreclosure to lessen the damage to their credit records. Some have been granted permission from their lenders to sell the property for less than they owe on the loan.Signs of Trouble
As the problems grow, at least one type of business is booming in Michigan -- those that help manage foreclosed property. Take the case of Property Maintenance Inc., which changes keys, mows lawns, shovels snow and repairs foreclosed-upon homes in Michigan so that they are ready for sale.
Deanna Simmons, who created the company in 2002, said the revenue of her six-employee firm shot up from $20,000 in the first year to $1.6 million last year.
Driving through the streets of a working-class neighborhood in Dearborn Heights, Simmons points out the tell-tale signs of a foreclosed house: mail boxes overflowing, fliers piling up, shades drawn.
Once inside, she can tell which people left angry. They're the ones who leave all the water faucets running or take the door knobs with them. "They do anything they can to make it difficult for the mortgage companies, like they're trying to get back at them," she said.
Simmons spots the home next door to Laitis, the Dearborn Heights resident alarmed by the foreclosures on her street. The white ranch house is not for sale yet, but the tell-tale signs are there.
Laitis said her neighbors, a couple in their 40s, left recently after they learned their house would be foreclosed upon. The husband, a carpenter, had lost his job. The wife did not work. They crammed what they could into their white Bonneville and drove off without saying goodbye.
Laitis said the house was paid for at some point but the couple took out a $75,000 home equity line of credit to buy a car and build a garage, now half-finished.
Lots of people can't afford their mortgage or can't afford rising property taxes, Laitis said. For her, the taxes have become onerous. She wondered aloud if she could lose her house for failure to pay them. She could.
"Maybe I'm going to be the next one out of here," she said.